Mobile Home Parks are a Great Bet in Recessions
You may already know that mobile home parks are one of the highest yielding of all forms of investment real estate. But you may not know that they really shine during recessions/depressions. In fact, in the current recession, mobile home parks are probably the best investment you can make.
Affordable housing grows in demand during bad economic times
If there's one group that is growing every day, it's people who are living on minimum wage or similar low levels of income. To this group, a mobile home is one of the only forms of housing they can afford. In fact, if you look at the government's suggested ratios for housing expense, assuming minimum wage, mobile home parks are the only form of housing that meets that budget. Even if you increase the hourly rate to $10 per hour, mobile home parks are the only option in that income category.
Easy credit has gone away, and removed other housing options for this group
Several years ago, mobile home park residents could often qualify to buy a single family home using zero down and no income documentation loans. However, that option has now vanished. Additionally, the option of what was called "land.home", in which the cutomer buys an acre of land for his mobile home as opposed to renting a lot in a park, has also been erased. In today's credit market, where a decent FICO score and a down payment are mandatory, there are no options for mobile home park tenants.
Tenants can't move out even if they want to
It costs around $3,000 to move a mobile home park from one park to another park. And that $3,000 is in cash up-front. No tenant in a mobile home park has that kind of money, and certainly isn't going to use it to move their home if they had it. As a result, your tenant base is consistent every month, and you don't have to drop rents or make other concessions to retain tenants. You also don't have to worry about the park down the street trying to steal your tenant.
Seller carry is abundant
Another advantage of investing in mobile home parks during a recession is the plentiful existence of seller financing. This is mainly due to the fact that most of the mobile home parks in the U.S. are owned by the original moms and pops who developed them. Of the 50,000 mobile home parks in the U.S., only around 10,000 are under institutional ownership. This allows you to bypass the lending requirements and scrutiny that current lending requires of you. And with bonding with the seller, downpayments as low as 0% are possible.
Now is the time to buy -- the window of opportunity is now
The length of the U.S. recession is unclear. However, the reasons to buy mobile home parks are not. If you want to buy a real estate asset at a 10%+ cap rate, and improve on that return during the recession, then you should investigate mobile home parks further.
Comments (7)
Rick, The only way to pay the bank on $200 per month lot rent is if your loan is based on that budget. If I buy a park with 100 lots and $200 lot rent, assuming a 30% expense ratio, you can support about a $1,700,000 loan. If you calculate in the park-owned home income and pay $3,400,000 then you can't make the numbers tie. An even greater complication is when the "spread" between park-owned home income and lot rent is huge -- like markets with $100 lot rents but $500 trailer rents. That's why it's a good idea to stick with markets with decent sized rents [$250 or so and up]. I've seen parks that have $75 per month lot rents that include water, sewer and trash. You are correct that old "junkers" are gaining in value. This is because the repo market is exhausted and park owners are still scrambling for units to fill their vacant lots -- or you have buyers who have been priced out, or forced out due to credit, of the other forms of housing and are desperate to find somewhere cheap to live. But the value of these homes varies widely based on location. A junk home in California may sell for $5,000 to $10,000, whereas one in Oklahoma may bring $100. It is very elastic.
Frank Rolfe, over 15 years ago
Hi Frank, I have been in the MHP biz for 25 years, and I have found it very difficult to pay the bank on $200 a month lot rent. The park owned homes bring in more than half of my income each month. I have noticed in the last year or so the value of the junk homes have risen substantually. Homes that were abandoned ready to be in the scrap bin are now selling for 5gs. That means the value of all preowned MHs are going to rise in value even in the parks. Rick
Rick K., over 15 years ago
Occupied lots are valued at around a 10% cap rate. Park-owned homes are a fully separate business that trades at a muchh higher cap rate -- may 20% to 30%+. To be safe, you value the home portion of the rent, above the lot rent, at the value of the home -- which can be very low, something like $1,000 to $7,000 on an older home. If the home rent is, for example, $500 per month, and the lot rent is $200 of that, you'd be buying a $7,000 home for $36,000 based on a 10% cap. The ratio off park-owned homes to lots does not matter, as long as you only include the lot rent in your calculations.
Frank Rolfe, over 15 years ago
I'm curious, what is the normal ratio of park owned homes to rental lots in a park? Is there a standard or does it vary wildly from park to park?
William G., over 15 years ago
Thanks. The quality of due diligence issue probably applies to all RE investments. On the discounting of park owned homes--can you explain the reasoning behind eliminating it? Is it for a pure evaluation of the park on its own and the MH rentals are a different business? Do you pay anything for this income? Thanks for this great info!
Jon Klaus, over 15 years ago
The single biggest mistake is insufficient due diligence. It is a safe bet that mom and pop have been "cooking" their books to some degree, and you cannot rely on their revenue and expense numbers. In addition, there are often problems with the operating permit. Other than due diligence, another common problem is "capping" the rent on "park-owned homes" -- essentially mobile homes that the park owns and rents out. The lot rent is the only legitimate form of revenue you can count in your numbers. The rent on park-owned homes is "junk" income that should not be factored in.
Frank Rolfe, over 15 years ago
Frank, what do you think are the biggest mistakes that first time MHP buyers make?
Jon Klaus, over 15 years ago